May 2012 – Page 11 – InvestMacro Forex News

May 23, 2012

Canadian Dollar Up against Major Peers Ahead of EU Leader’s Meeting

By TraderVox.com

Tradervox (Dublin) – The EU leaders are expected to meet today in a meeting to discuss the prospects of the monetary union. The discussions at the meeting are expected to heat up as Angela Merkel, the German Chancellor, and the new French President Francoise Hollande seek to present their ideas on how the debt crisis should be handled. Hollande is opposed to Merkel’s led austerity drive and proposes the introduction of euro bond to curb the debt crisis in the region. Discussions about the Greece are also expected to take center stage during the meeting.

As the leaders prepares to meet, the Canadian dollar has improved against most peers as risk appetite returned in the market, even though is for a short time. Investors are waiting to see what the leaders will decide concerning the status of Greece in the euro zone. EU leaders seem united in doing everything possible to keep Greece in the single currency bloc and that is what is raising the risk appetite in the market. After meeting with new French Finance Ministers, Germany’s Finance Minister Wolfgang Schaeuble reiterated that European officials will do everything possible to keep Greece in the 17-nation trading bloc.

As the EU leaders meet, Dean Popplewell who is a chief currency strategist at Oanda Corp indicated that the market is playing it very tight prior to announcement of the leaders’ decision. Investors will also keep a close eye on what leaders will say during the meeting and they are particularly concerned about positions taken by French president and German Chancellor who are seen as key players in ensuring the success of austerity measures.

Any sign of consensus will spur risk appetite that will lead to higher demand for higher yielding currencies. The Canadian dollar has already started showing some improvement as it improved by 0.6 percent against the euro to trade at C$1.2963 per euro as it gained for the second day. However, the current risk appetite was not enough to push the loonie against the greenback where it dropped 0.5 percent to trade at C$1.0224, it had earlier gained by 0.2 percent as it tries to find some footing.

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May 23, 2012

Market Review 23.5.12

Source: ForexYard

Fears of a Greek exit from the euro-zone brought the EUR/USD within range of a four-month low yesterday. Facebook dropped another $2 a share during overnight trading while crude oil is trading below $91 a barrel.

Main News for Today

EU Economic Summit-All Day
• Traders will want to pay attention to any announcements following the summit
• Investors will be waiting to see if France and Germany can come to an agreement over how best to stimulate economic growth in the euro-zone
• Positive developments could lead to short term euro gains
US New Home Sales-14:00 GMT
• The dollar saw gains against the yen yesterday following a better than expected US Existing Home Sales figure
• If today’s news come in as expected, the USD could extend yesterday’s gains

Dollar Sees Gains across the Board

Source: ForexYard

The US dollar moved up vs. virtually all of its main currency rivals yesterday, following negative data out of the UK and Japan which caused investors to shift their funds to the greenback. A worse than expected UK CPI figure resulted in the GBP/USD tumbling close to 85 pips during the European session. The pair reached as low as 1.5762 before staging a slight upward correction during afternoon trading. Against the JPY, the dollar was able to benefit after Fitch Ratings downgraded Japan’s credit score. The USD/JPY shot up over 60 pips following the news to come within reach of the psychologically significant 80.00 level.

Turning to today, dollar traders will want to pay attention to the US New Home Sales figure, scheduled for 14:00 GMT. Analysts are forecasting the figure to come in at 335K, which if true, would represent the second consecutive month of growth in the US Real Estate sector. Should the news come in as expected, the dollar may be able to extend yesterday’s gains against the yen and UK pound. That being said, if today’s indicator comes in below the predicted level, the greenback could reverse its recent bullish trend.

The Commodity to Prepare Your Portfolio for in a Post-China World

By MoneyMorning.com.au

If we learnt one thing from the 2008 stock market crash it’s that all asset prices can fall, regardless of the market fundamentals.

Leading up to 2008, many thought companies that dealt in hard assets (commodities such as iron ore, gold and copper) would be immune from price falls.

Why?

Because they owned the rights to tangible assets. The copper would still be in the ground…it wouldn’t suddenly disappear, and therefore these stocks would be safe.

What they forgot is that iron ore, gold and copper in the ground isn’t the same as iron ore, gold and copper in your hand.

To dig up those resources, a mining firm needs another kind of resource – money. And when markets crash (especially in a credit crunch where it’s harder to borrow money), money is harder to come by.

So, with the market hitting the skids and some analysts (including our own Slipstream Trader, Murray Dawes) predicting further big falls for the Aussie market, is there a resources ‘safe haven’ investors can rely on?

We think there is, and we’ll explain why now…

Now, before we go on, let’s make one thing clear. The resource investment we’ll mention isn’t immune from price falls either.

In fact, some of the stocks we’ve looked at have already fallen by double-digit percentages in recent weeks. And they could fall further.

No. When we talk about a ‘safe haven’ we’re talking about the fundamentals of the commodity rather than the price action of the commodity.

It’s a commodity that we believe will still be in demand even when the Chinese economy comes to a grinding halt. And even if another major economy doesn’t replace China’s huge demand for resources.

So, does such a resource even exist?

After all, you’ve probably read the stories about how China consumes 70% of the world’s concrete, 60% of the world’s coal and iron ore, and 40% of the world’s copper.

Yet, such a resource does exist. In fact, there are two of them.

A Commodity That Doesn’t Rely on China

As the following chart shows:

Source: Thomas White Global Investing

You’ll notice the two bars on the right of the chart – oil and natural gas. As of 2009, China’s share of world demand was 10% and 4% respectively.

Yes, the figures have grown since 2002. But they’re still small compared to total world consumption.

So where a collapse in demand for iron ore and metallurgical coal will see prices slump and funding for coal and iron ore explorers dry up, a collapse in China’s demand for oil and gas should have a much lesser impact on oil and gas prices and demand.

Again, we’re not saying there won’t be an impact. What we’re saying is, even after a Chinese economic collapse there will still be a big demand for oil and gas. That’s not something you can say about commodities like iron ore and copper.

We mean, who will take up the slack when China stops buying iron ore? Who will take up the slack when China stops buying copper…or aluminium?

If China’s iron ore demand slips back to 2002 levels, you can say goodbye to the iron ore explorers and producers. Especially firms that have borrowed big, like Fortescue Metals [ASX: FMG].

So your guess is as good as ours on who will replace China as the dominant market for bulk metals. What about India? We’re not convinced, but we guess it’s possible.

The way we look at it, the problem with bulk metals is the lack of innovation. Maybe if we saw a change like in the late 19^th century when steel pushed aside iron in the building industry, then we may see a good future for bulk metals.

But we don’t.

An Innovative Commodity Resource

Compare that to the innovation you see in the energy markets. Take this story from Bloomberg News as an example:

‘Shell’s plan to spend $250 million on an LNG plant and a string of filling stations is the biggest single investment yet in making frozen gas a transport fuel, a shift advocated by proponents of energy independence including billionaire investor T. Boone Pickens. Switching engines to run on LNG is becoming economic because a glut of fuel from North America’s shale rocks has made the U.S. the world’s largest natural-gas producer and forced prices to record discounts versus crude oil.’

The outlook for natural gas is even stronger thanks to new technology in the energy industry.

The US shale gas revolution has set the US on the path to energy independence. Now that there’s proof the technology and recovery methods work, the pattern of energy independence is set to spread world-wide.

When the Chinese economy finally implodes (it’s on the way), the last place you’ll want to have your money is in bulk metals.

As we say, energy stocks will take a hit too. But if you want a resource that has the best chance of recovering early and marking up big gains as the world adjusts to a post-China global economy, the best place to bet is the energy market…

And especially natural gas.

Cheers,

Kris.
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The Commodity to Prepare Your Portfolio for in a Post-China World

May 22, 2012

How Chinese Stocks Are Fading Fast

By MoneyMorning.com.au

Last week, China reported weak economic numbers, prompting the government to cut the reserve required ratio for banks resulting in looser monetary policy.

A lot of people are urging investors to invest in the Chinese stock market. I think that would be a terrible mistake. China is in the midst of a very painful episode in its history. China’s economy has recently slowed to its slowest pace in two and a half years. And that is likely to continue.

China suffers from serious bottlenecks, including lofty property prices, rising wages and higher logistics costs due to manufacturing’s move to the hinterland (the ‘Go West Policy’). The results are higher inflation (3.4% at the latest count) and slowdown in foreign direct investments (which in fact peaked in August 2011).

China’s economy typically generates top-line nominal growth of 14% on average, but the split between growth and inflation has fallen to the lowest in over a decade in the last two years. Meanwhile earnings are tumbling.

The profitability for Chinese non-financial state-owned enterprises (SOEs) is at the lowest level since 2001 (excluding 2008). And the latest reporting season for Chinese stocks was the worst since 2008.

While MSCI China trades on a prospective price/earnings (PE) ratio of 9.7 times and an estimated 11.6% earnings per share (EPS) growth, analysts have been busy downgrading their numbers since September 2011.

I see the fundamental problem being that profitability appears to be on a secular decline. This is evident by proposed reforms such as reducing the cartel power of state-owned enterprises (the majority of listed Chinese stocks), market pricing of key inputs such as capital and energy and higher taxation (to pay for social reforms).

Last time reforms took place was in the late 1990s, focused on SOEs and banking reforms, which helped unlock huge productivity gains and fuel China’s high octane growth rate for a decade. The snag was it took China’s stock market more than five years before it moved sharply higher. The same could happen again, further aggravated by a West that is de-leveraging.

Investors Back Away from the Chinese Stock Market

Not that investing in China’s stock market is a good idea anyway.
The Shanghai market, the leading local exchange, is a very peculiar beast. Following WTO-membership it started with total inaction for almost five years. Then, in a short period, spanning from March 2006 to October 2007, the marked surged 2.5 times. The gain was short-lived and it hit a trough in November 2008.

The market yielded 52% over 11 years – equivalent to a 4% compound annual growth rate – compared to an average real GDP growth of 10%. That translates into a real return of 1.5% pa, meaning in plain language that 85% of the GDP growth was not captured by the Chinese stock market.

Investors sense something is not right. They recognise a corporate culture that has become renowned for accounting scandals. Short-sellers, aided by independent research houses, have been investigating Chinese companies listed in the US and Hong Kong for years. Last week, rumours in Hong Kong suggested a well-known research house has a list of 36 names under negative review.

Local investors are also less enthusiastic as the number of newly opened accounts in Shanghai has dropped to the lowest level since 2001. Instead investors have aggressively bought wealth management products, which are investment products that can avoid regulatory caps on deposit rates. Companies and people have moved their deposits to areas that can give higher returns.

This has three major implications:

it puts strain on banks’ balance sheets and ability to lend, which may help to explain the disappointing loan growth;
it forces entrepreneurs to pay high interest rates for loans: the percentage of loans charged above benchmark lending rates has increased from 30-40% to a record high of over 60%;
perhaps most worrisome, it makes it more difficult for the government to control the economy; the shadow banking system is estimated to account for one quarter of the total outstanding credit in China, up from 18% in 2009.

A survey shows that 60% of Chinese millionaires are thinking about emigrating to the U.S., Canada or another country, the Wall Street Journal reported. The main reasons cited in the survey were their children’s education, fear of sudden changes in China’s political situation and concern about worsening business conditions.

China’s Slow-Motion Stock Market Crash

My personal experience from investing in China over many years is that is a policy-driven market: good news fuels spurts of robust stock market performance. And given the political handover within the Communist Party in November – where seven out of the nine politburo members are to be replaced – I think that looks less likely.

China operates a closed capital account and non-convertible currency meaning that liquidity cannot be pulled by investors on short notice, as was the case in the Asian financial crisis. Instead of a short and sharp crisis like in 1997, I envisage a prolonged downtrend – like Japan’s economy – as the financial system slowly digests poor loans and misallocation of capital.

China’s stock market as the best long-term way to invest in Asia is probably wrong. At least that is the experience from Europe, according to a recent study by Credit Suisse. While the biggest economies – Germany and France – offered a paltry 2.9% annual return over the last 112 years, the smaller peers yielded far higher: Sweden (6.1%), Finland (4.8%), Netherlands (4.8%) and Switzerland (4.1%).

I see no reason why Asia should be much different. That’s why I’ve been talking about an Asia that is no longer dominated by China. As China gets sucked into a slow-motion crash, the likes of Malaysia, Indonesia and Singapore will do everything they can to boost bilateral trade. And that is going to produce some formidable opportunities.

Lars Henriksson
Contributing Editor, Money Morning

Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek (UK)

From the Archives…

How the Ukraine Could Be Europe’s Biggest Shale Gas Play
2012-05-18 – Kris Sayce

Why Greece Can’t Afford to Stay in the Euro
2012-05-17 – Dan Denning

Get in Early on Shale Gas
2012-05-16 – Dr. Alex Cowie

APPEA – Day One at the Oil & Gas Show: Sand Dunes, Scuba Diving and Camels
2012-05-15 – Dr. Alex Cowie

The Case for Higher Gold Prices
2012-04-14 – Diane Alter

How Chinese Stocks Are Fading Fast

May 22, 2012

A “Turning Point” for the Chinese Economy …and Australia

By MoneyMorning.com.au

Last week I went to hear fund manager Michael Riddell of M&G Investments talk about his views on emerging markets.

When it comes to the biggest of them all – the Chinese economy – his take is that “the question is not if, but when China’s bubble will burst”.

We don’t disagree with Riddell. In fact, we’d argue that the Chinese bubble has probably already burst. It’s now in the process of deflating.

One country that’s already feeling the pain is Australia.

China’s Economy Has Passed the ‘Lewis Turning Point’

M&G’s Michael Riddell is a big fan of the work of the economist Arthur Lewis. Lewis’s idea was that most growth occurs during the change from a rural subsistence economy to a modern urban one. During this period returns to capital are high, encouraging investment.

However, once all rural labour has been absorbed, growth quickly slows. Attempts to continue the pace of growth via ever-increasing levels of investment, simply lead to poor returns. It also risks creating a credit bubble.

This is the ‘Lewis Turning Point’. And Riddell believes that the Chinese economy has passed it. He also believes that the increase in private credit, which grew by more than 50% each year from 2009 to 2011, shows that there is a bubble.

Rising debt isn’t necessarily a bad sign in itself. Leverage usually increases as a country gets richer. However, Riddell points out that, despite its low per capita GDP, Chinese leverage is already on a par with much wealthier countries such as Hong Kong and Japan.

We’d be inclined to agree with Riddell’s take. Even if you’re not convinced, it’s certainly becoming clear that the Chinese economy has passed some sort of turning point.

As well as facing a fall in its long-term rate of growth, China’s economic short-term woes are mounting. April’s industrial production growth slowed down to 9.2% year on year, the lowest figure since mid-2009. GDP growth fell to 8.1%.

Although these figures both still sound impressive, you have to remember that – like every other government – China’s leaders aren’t above fiddling the data for propaganda purposes. This means that the trend, not the actual figures are key.

An even bigger hint of major problems is the latest trade data. Exports grew by 4.9%, compared with a year ago. This was much lower than the 8.5% expected. Imports effectively stayed the same, going up by only 0.3%. This suggests that China can neither export its way out of trouble nor rely on domestic demand.

The Impact of a China Slowdown on Australia

A slowdown in China should have a big impact on its ’51st state’ – Australia. While China’s massive demand for resources has shielded Australia from the global financial crash to a great extent, this is now set to go into reverse.

This would be bad enough even if Australia was in a hugely sound economic state. But it’s not. It has suffered a rampant housing bubble that has made it one of the most expensive places to live in the world. That bubble is already collapsing. According to the Australian Bureau of Statistics, average Australian house prices have now fallen for five straight quarters.

Meanwhile, the latest economic surveys show that both the manufacturing and service sectors are in deep trouble, with activity in both shrinking rapidly. No wonder the Aussie dollar has toppled back through parity with the US dollar.

Matthew Partridge

Contributing Editor, Money Morning

Publisher’s Note: This is an edited version of an article that originally appeared in MoneyWeek (UK)

From the Archives…

How the Ukraine Could Be Europe’s Biggest Shale Gas Play
2012-05-18 – Kris Sayce

Why Greece Can’t Afford to Stay in the Euro
2012-05-17 – Dan Denning

Get in Early on Shale Gas
2012-05-16 – Dr. Alex Cowie

APPEA – Day One at the Oil & Gas Show: Sand Dunes, Scuba Diving and Camels
2012-05-15 – Dr. Alex Cowie

The Case for Higher Gold Prices
2012-04-14 – Diane Alter

A “Turning Point” for the Chinese Economy …and Australia

May 22, 2012

USDJPY breaks above 79.70 resistance

USDJPY breaks above 79.70 resistance, suggesting that lengthier consolidation of the downtrend from 84.17 (Mar 15 high) is underway. Range trading between 78.99 and 80.61 is expected in a couple o fays. Key resistance is located at 80.61, as long as this level holds, one more fall to 78.00 is still possible. On the upside, a break above 80.61 will indicate that the fall from 84.17 has completed at 78.99 already, then the following upward movement could bring price back to 83.00 zone.

usdjpy

Daily Forex Analysis

May 22, 2012

Central Bank News Link List – 22 May 2012

By Central Bank News
Here's today's Central Bank News link list, click through if you missed the previous central bank news link list. Remember, if you want to submit links for inclusion in the daily link list, just email them through to us or post them in the comments section below.

Monetary Policy Week in Review (Central Bank News)
The week ahead in central banking (Financial Times)
Czech National Bank Holds Interest Rate at 0.75% (Czech Position)
Central Bank of Nigeria Holds Rate at 12.00% (Reuters Africa)
Ukraine central bank lowers reserve levels (Bloomberg)
Brazil sells swaps to support the real (MNI News)
IMF says Britain needs more monetary easing (MarketWatch)
New Zealand inflation expectations ease slightly (Stuff)
Potential for a third LTRO increasing (Fitch Ratings)
Secret c.bank aid props up Greek banks (CNBC)

Source: www.CentralBankNews.info

May 22, 2012

Dollar: Surviving Safe Haven

By TraderVox.com

Tradervox (Dublin) – The Forex markets were quiet in the Asian session with the Euro, Pound, Yen and the Franc trading flat. However bullish momentum was visible in the commodity currencies, Canadian Dollar and the Australian Dollar, supported by Chinese government comments to take on measures to boost growth, thereby driving up demand for commodities.

However the gains in the commodity currencies did not spill into the European session. In fact the Canadian Dollar and Australian Dollar reversed gains and turned bearish. Gold and silver which were in tight bounds saw bearish sentiments into the European session. The reason for this was huge dollar inflows on the back of risk aversion driving up the dollar index to 81.3 levels.

Risk aversion already supported by Europeans saw further support coming in from the Japanese. The Fitch rating agency has downgraded Japan by one notch to negative on rising debt concerns in the country. This has led to strong outflows from the safe haven Japanese Yen to the US Dollar.

US dollar remains as the sole safe haven which is enjoying strong inflows backed by the strong revival in the US economy and the recovery in housing market.

The major releases today were the UK CPI and UK Core CPI. Consumer prices in the UK rose from the previous 0.3% to 0.6% as expected while the Core CPI fell from the previous 2.5% to 2.1% beating expectations of a fall to 2.0%. After the CPI data there was a huge selling in the GBP/USD pair driving the pair to 1.57648 levels where the pair found support.

Moving into the US session, the US economy posted the home sales data which showed a huge improvement, beating expectations to rise to 3.4% from the previous -2.8%.

This has resulted in outflows from traditional safe havens Gold and Yen into the Dollar.

Tomorrow the European leaders meet in Brussels for talks regarding the European Debt crisis. Greek Exit and Euro bonds are likely to be on top of the agenda. Markets do not however expect any meaningful output, as had happened with previous summits.

May 22, 2012

NZD/USD Cross Remains Bearish on Eurozone Crisis

By TraderVox.com

Tradervox (Dublin) – Commodity sensitive currencies have taken a hit in the recent weeks following the resurgence of debt crisis and political uncertainty in euro area. The New Zealand currency has taken a beating against the US dollar as risk aversion takes center stage in the bourse. The pair is expected to continue on the downward trend during this week as weak financial data is expected from New Zealand this week.

Today, the inflation expectation data will be released. The report is expected to show that the CPI for the first quarter has dropped to 2.5 percent as compared to last year’s first quarter CPI of 2.8 percent. Despite the inflation moderating in March, the advance of the New Zealand dollar is expected to limited due to risk aversion.

Another report that is expected to affect the cross is the trade balance report to be released on Wednesday at 2245hrs GMT. There is expectation that trade balance decline to $134 million in March. This is a continued decline from February when it declined to $220 million. The annual Budget Release on Thursday at 0200hrs GMT is expected to show the tight financial constraints in New Zealand. These reports are deemed as bearing for the NZD/USD cross hence it is expected to continue with a decline setting the kiwi up for another weekly decline.

Some of the technical lines worth watching out for are the 0.7620 which has provided support in May 2012 and its resistance. The 0.7550 has gained a stronger role of separating ranges just like it did in January. On the lower side, the 0.7470 line is a crucial support and it had a similar role at the beginning of 2011. If this line is crossed, then it would open the door for December low support of 0.7370, which is crucial line.